Slammed! How Trademark Laws Hurt the Little Guy
It’s the same sad story all over again. A small business owner walks into the law
office with a rejection of his U.S. trademark application. He’s been in business for twenty
or more years under this trademark. He has a name, signage, advertising, business cards,
letterhead, a website, a corporate name and a domain name using this exact trademark. Can
you help him? Possibly, but probably not.
This small business owner has just been slammed. He thought it was easy to apply for
federal trademark registration—just access www.uspto.gov, fill out the form, and pay the
fee. If that’s too hard, there are non-lawyer shops that will provide those services for less
than $100. He also understood that the first person to use a trademark owns the trademark. So he hasn’t been in a big hurry to file a trademark application—he’ll rely on his common law rights. He’s never had a trademark problem, and with so many years of use, there
shouldn’t be one now, right? Wrong. Very, very wrong. This small business owner is now in
a far worse legal position than if he had never filed a federal trademark application.
In the U.S., paperwork now is more important than actual trademark use. For some
time now, a third party can file a federal trademark application and limit the small business
owner’s right to use his trademark to his geographical “trading area” as it existed on the
date of the third party’s federal trademark registration. Unfortunately, that “trading area,”
if contested, is likely to be far smaller than the geographical area in which the small business owner actually trades because ultimately he will have to prove where his sales took
place prior to the date of the third party’s registration. Trying to prove up sales many years
later can be excruciating because no one, in the ordinary course of business, keeps invoices
for so many years or a history of website orders or even copies of what the website looked
like over time. So the small business owner almost always loses ground because he rarely
can prove up the entire geographical area of his preexisting use.
Worse, once his federal application has been rejected, the small business owner will be
hesitant to get a state trademark registration to record his regional rights in many states like
California. That’s because California and a number of other states have adopted the “Model
State Trademark Act,” which sounds progressive but was drafted by big trademark owners
who don’t want to be bothered by pesky state trademark registrations owned by local businesses. Under the “Model State Trademark Act,” the California Secretary of State requires
the applicant to state whether it or any predecessor in interest has filed a federal trademark
application, and if registration was refused, why it was refused. Although a California registration will be granted, this negative information will become part of the registration record, so the small business owner must be advised that this is an admission against interest
and generally considered not advisable to the extent it places negative information on the
public record. Why this is so is a mystery because the statute makes these admissions optional, but the California Secretary of State has chosen to make them mandatory.
The rejection of the small business owner’s federal trademark application is most maddening when it is based on a foreign trademark which has never been used in the U.S. and
sometimes never been used even in the home country. That is because there is now a procedure (called the “Madrid Protocol”) whereby the U.S. will register foreign trademarks
based on foreign applications, even if there is no use anywhere. This is completely contrary
to what U.S. trademark law used to be, namely, a system for registering trademark rights
that already existed under the common law because they were created by use. The big tradenew matter
volume 35, number 3
Katherine L. McDaniel
Fulwider Patton LLP
mark owners talk about “harmonization”
with the trademark laws of other countries,
but this is a gimmick, because U.S. trademark law always has been different from
the trademark laws of most other countries,
who generally view trademarks as monopolies to be bought and sold.
That is because, in the United States
and other English law countries, trademark
registrations existed for the purpose of
registering common law trademark rights.
Trademark rights arose automatically upon
the use of a trademark, and were registered
in order to be documented and more easily enforced. In fact, U.S. trademark owners still need to show use in the U.S. before
they can obtain a U.S. trademark registration, but foreign trademark owners do not
need to show use in the U.S. (or anywhere
else) in order to obtain a U.S. trademark
registration.
Apart from basic issues of fairness, there
are constitutional reasons to be concerned
about current U.S. trademark law. While
the U.S. Constitution allows the federal
government to issue monopolies for patents
and copyrights, there is no such provision
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for trademarks. Instead, federal trademark
laws are based on Congress’ ability to regulate interstate commerce. So where’s the interstate commerce for a foreign trademark
that has not been used in the U.S.? Indeed,
the U.S. is granting trademark rights in the
absence of any commerce at all—in other
words, selling monopolies. Sadly, this really
is the sale of monopolies because the federal
government is siphoning off a huge portion of
trademark registration fees for use elsewhere
in the budget. This is exactly what our Founding Fathers hated about Europe—the selling
of all kinds of monopolies (to trade in silk,
wool, tea, slaves, etc.) by kings and queens
looking to fill their coffers at the expense of
consumers and free trade. This is why under
the Constitution, the only monopolies Congress can grant are supposed to be patents and
copyrights because they are limited monopolies, and only these monopolies were believed
to promote science and the useful arts.
Meanwhile, small business owners in the
United States are being slammed with refusals to register their clearly viable common law
trademark rights based on their many years of
doing business under the trademark without
any likelihood of confusion by consumers.
The story usually goes something like this.
There is a small shoe repair business called
“Kathy’s Shoes” with a couple locations, that
has been in business for over 30 years in Los
Angeles. Upon filing its federal trademark application, “Kathy’s Shoes” is refused registration due to a pre-existing federal registration
of “Kathy” for a major French retail shoe store
chain (that incidentally offers shoe repair),
which filed for and obtained a U.S. trademark registration under the Madrid Protocol, but has
no use in the United States, or perhaps has use in the U.S. postdating Kathy’s Shoes.
What are the options for Kathy’s Shoes? To argue against the refusal based on the differences between the trademarks, the goods and services, the consumers, and the channels of
trade will cost approximately $1,500 to $2,500 (or considerably more) and is not likely to be
successful. To petition to cancel the “Kathy” registration based on nonuse is the U.S. will cost a
minimum of $3,000 to $5,000, and if contested, a minimum of $20,000 to $50,000 and sometimes as much as $300,000. If the matter goes to court, the cost could be over $1 million. (This
is why they say that trademarks are not a poor man’s game.)
Most small business owners can’t afford this. Meanwhile, “Kathy’s Shoes” can’t even get a
California trademark registration without acknowledging the preexisting federal registration
of “Kathy” by the French shoe store chain. So what really happens is nothing at all and “Kathy’s
Shoes” shrinks away as a business—it can’t really expand or franchise and will be lucky to just
hold on, especially if the French company comes to California and sends “Kathy’s Shoes” a
cease and desist letter. And when it is time to sell “Kathy’s Shoes,” the trademark will have little
or no value.
What should small business owners do? Given that the current structure works for big business and is not likely to be changed, small business owners should get on top of their trademark
paperwork, but should never file a trademark application blind. At a minimum, a preliminary
search should be done to determine if there are any major obstacles to registration, and steps
taken to steer around them. It may be advisable to file the trademark in the unique font or script
in which it appears, together with a design if appropriate, to make the trademark as different as
possible from any trademark registration or application. The description of goods and services
should be tailored to make them as different as possible from the goods and services of any
similar trademark registration or application. Perhaps it may be advisable not to file a federal
application at all, but to file a state application to at least protect the longstanding regional business. In any event, the small business owner should assume that the law is not on his or her side,
and cannot be put on his or her side without expert legal advice. The views expressed in this article are personal to the author and do not necessarily reflect the
views of the author’s firm, the State Bar of California, or any colleagues, organization, or client.
© Katherine L. McDaniel 2010.
Katherine L. McDaniel is of counsel at Fulwider Patton LLP, the oldest IP boutique in
Los Angeles. She is a former Chair of the IP Section, former Trustee of the LA Copyright
Society, and former Director of IP for The Times Mirror Company prior to its acquisition by
the Chicago Tribune Company.
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